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How to Repair Your Credit After a Divorce
By Amarilis Yera MONEY RESEARCH COLLECTIVE
Divorce often brings new financial challenges, such as adjusting to a single income and managing debts that were once shared. This shift can make it difficult for some people to keep up with monthly bills, leading to missed payments and a damaged credit history.
If that’s your situation, taking steps to repair your credit after a divorce is crucial for regaining control of your finances and setting yourself up for the future.
Keep reading for practical tips to help you get started on the right path.
8 steps to rebuild your credit after divorce
Assess your financial situation
After a divorce, it’s important to assess your finances to get a clear picture of your financial health — this includes understanding where you stand regarding your income, debts, savings and expenses.
Start by reviewing your budget and monthly expenses. It’s a good idea to take a close look at where your money is going each month, whether it’s loan payments, utility bills or other everyday costs. This will help you adjust your spending and determine how much you can spare to pay down any remaining debts.
Also, consider setting aside a small emergency fund as you rebuild your credit. This can provide a safety net for unexpected expenses without taking on additional debt.
Close all joint accounts
Even if your divorce decree says who’s responsible for certain debts, it’s a good idea to close joint credit accounts if possible. Otherwise, your credit could be impacted by missed payments or other negative factors, even if you weren’t the one responsible.
Here’s how you should go about closing joint credit accounts:
- Credit cards: You both need to agree to close the account once the balance is paid off. If you can’t pay the balance off, you can transfer the balance to credit cards that each of you own separately. If you’re just an authorized user, it’s as easy as asking the credit card company to remove you from the account.
- Mortgages: If you bought a home with your former spouse, both of you will continue to be responsible for repaying the mortgage. In this case, you can consider selling the property and dividing the profits or buying out the other party. You can also consider an assumption agreement, where one party transfers the mortgage to the other.
- Car loans: You can sell the car or refinance the loan in just one person’s name. However, the court can award the vehicle to one of you, and that person should refinance the loan independently. Then, a title transfer will be necessary to update the ownership records.
Check your credit report
Taking the time to review your credit report can help you spot any joint accounts or lingering debts that you may still be responsible for. You can also check for errors that may lower your score — like accounts that don’t belong to you or that should have been closed.
You can get a free credit report from each of the main credit bureaus (Experian, Equifax and Transunion) once per week through AnnualCreditReport.com.
You can dispute any errors you find on your credit reports for free. The major credit bureaus have online dispute forms to make the process faster. You could also consider hiring a credit repair company, but keep in mind that they can’t do anything you can’t do yourself for free, like sending dispute letters to the credit bureaus. Also, they can’t remove any accurate information from your credit report, so beware the companies that make such promises.
Monitor your credit score
Monitoring your credit score is also important since having a good score can get you favorable loans and credit card offers. It can even help when renting an apartment, as many landlords now look at your credit history as part of their evaluation process.
Credit monitoring services may be a good option, as they send real-time alerts for changes to both your credit report and score. You can also use a free credit score website, like Credit Karma, or check if your credit card company or bank lists it on your monthly statement or online account.
Establish your own credit history if you don’t have one
If most of your credit history comes from joint loans or being an authorized user on someone else’s cards, it’s important to start building your own credit.
Getting your own credit card and paying it off each month can be one of the best ways to build credit over time. If you’re struggling to get approved for a regular card without your spouse’s credit history or because your income has changed, consider a secured credit card.
Another option is getting a credit-building loan, which is designed to help people establish or improve their credit.
Pay your bills on time
Your payment history is crucial because it’s the most significant factor influencing your credit score. Even a single late payment can drop your score by 50 points or more, depending on your overall credit situation.
Make sure to always pay your bills on time, as it shows lenders you’re responsible with debt and is crucial for rebuilding your credit. To help you stay on track with timely payments, consider setting up reminders or automatic payments. This can save you from late fees and high interest charges.
Pay down your credit cards and other debts
Paying down your credit cards lowers your credit utilization, which is the second most important credit scoring factor. Credit utilization ratio refers to the amount of credit you’re using compared to your total credit limit. For example, if you have a $10,000 limit on a card and you’re using $5,000, your utilization is 50%. Keeping this percentage below 30% shows lenders you’re managing your credit responsibly.
Paying off other debts, like personal loans, is also a smart move because it lightens your overall debt load and helps you avoid missing payments. Plus, lowering your overall debt can improve your debt-to-income ratio, which is another factor lenders usually consider when evaluating your creditworthiness.
Talk to a credit counselor
A credit counselor can help you create a personalized plan to better manage your finances and improve your credit score. They can provide budgeting assistance, homeownership workshops, debt management plans and more.
Many counselors work in non-profit organizations and offer their services for free or at a low cost, so it’s a good way to get professional advice without breaking the bank.
The process usually begins with the counselor thoroughly assessing your financial standing, including your income, expenses and debts. They then work with you to create a plan to reach your long-term financial goals.
FAQs
Does divorce affect your credit score?
Divorce doesn’t directly impact your credit score, but it can affect your credit if joint accounts are mismanaged or you miss bill payments during the process. Also, keep in mind that certain actions — like removing yourself as an authorized user and applying for new credit — can impact your credit score by changing your credit utilization, credit history, and recent inquiries.
How can I protect my credit during a divorce?
You can protect your credit during a divorce by checking your credit report for potential errors, closing or separating joint accounts, removing yourself as an authorized user and freezing your credit report.
Can I open a new credit card during divorce?
Yes, you can open a new credit card during a divorce, but you should be cautious. Opening a new card can affect your credit score due to the hard inquiry and potential changes in your credit utilization. It’s also important to make sure you’re managing the new account responsibly, especially during the financial adjustments of divorce.